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BFD Expert Voices - Health Tech Deals

BFD Expert Voices

Health-tech dealmaking this year will be characterized by more profit-focused investment playbooks, industry sources tell Claire.

Why it matters: Gone are the days of uber-frothy revenue exit multiples, as the market reset forces health tech companies and their investors to shift their mindsets. 

What they’re saying: “Revenue multiples are more out of favor than they certainly were,” says THL managing director Josh Nelson. 

“The 'rule of 40' should continue to be a guide for when SaaS revenue multiples will apply," says Mark Tomaino, operating partner at Welsh Carson Anderson & Stowe.

An asset’s gross margin profile will be more closely scrutinized in next year’s market, by all corners of the market, he says. 

For early-stage, not-profitable digital health assets, investors like Alison Ryu of Able Partners spend increasing time mapping the evolution of gross margins.

“We don’t have years and years of data or pure quantitative proof of unit economics at the time of our first investment,” says Ryu, a partner at Able. 

Yes, but: Health tech is “still a market driven by revenue multiples,” despite EBITDA multiples and other key performance indicators coming into play, says Kevin Eisele, co-head of equity capital markets for health care at William Blair.

Zoom in: Technology that automates health care workflows will be especially prized in today’s market, particularly amid an ongoing labor crisis.

“The most compelling value proposition is when you’re doing anything that helps with enhancing revenue," Tomaino says. "If you can show you’ve enhanced revenue, there is demonstrable ROI, you’ve effectively paid for your solution.” 

“Technology is a powerful enabler in a challenging macro environment, where we see labor challenges, supply side constraints and inefficiencies across the provider universe, which have all been exacerbated by COVID,” Nelson says. 

Meanwhile, pharma services technology offers compelling tailwinds as decentralized clinical trials gain traction following pandemic disruption of R&D, both Tomaino and Nelson say. 

"The clinical trial data landscape will become increasingly fragmented and should drive demand for data management and interoperability solutions,” Tomaino says, noting that clinical data tends to be fragmented and disorganized.

Between the lines: Consumer-focused health has drawn interest and investor dollars in recent years, but the approach isn’t easy to nail, Nelson says.

"If the business model can’t demonstrate that tangible ROI, we’ll be more cautious," he says. "One of these areas is around the consumer — focusing on what they’re seeking, and how to measure and prove out the ROI.”

Able's Ryu says direct-to-consumer strategies are difficult to scale to profitability, but the firm has found success with B2C models.

The intrigue: Blair’s Eisele says that “while there aren’t a lot of public opportunities just yet, companies working in social determinants of health are going to be a focus in the sector.”

Two players come to mind: Cityblock, most recently valued at $6.3 billion, and Carbon Health, valued at $3 billion in 2021. 

Editor's note: This story has been updated to clarify that Kevin Eisele is co-head of equity capital markets for health care at William Blair.

1 big thing: Cash is king for health-tech M&A  

Illustration of a giant health plus on top of a pile of cash, the ground underneath is cracking.

Quris, an AI-powered prediction platform for clinical trials, is prepping to raise as much as $100 million in Series A capital, CEO Isaac Bentwich tells Claire exclusively.

Why it's the BFD: The ambitious round size reflects industry appetite for solutions that make clinical trials simpler and more efficient.

How it works: Using artificial intelligence, Quris' platform is designed to predict what drugs will be safe in humans and for whom.

The company's "organ-on-a-chip" technology (a miniaturized human organ) lets researchers test the toxicity and safety of drugs — cutting the time, cost and potential for error in animal and human trials.  

Quris' customers include large pharmaceutical companies like Merck KGaA, helping optimize clinical trials for existing drugs in development.

Quris also works with academic partners and is currently progressing a licensed drug candidate for genetic disorder Fragile X through clinical trials.

By the numbers: Quris expects to book over $10 million in revenue this year, Bentwich says.

The company is projecting $100 million in revenue by 2025, based on its current pipeline, he adds. 

Quris is in "several advanced discussions with the other top 20 pharma companies" and in advanced talks regarding more than 20 drug candidates with various academic institutes, he says. 

With the Series A funding, Quris hopes to be profitable in the next three years, he says.

The intrigue: Alongside its B2B model, Quris is providing its technology directly to consumers.

Bentwich describes a subscription-based service in which patients provide a blood sample and Quris generates miniature organs to test a drug's safety or interaction with other drugs. 

Physicians and other health care providers are looped in with results and data, Bentwich says

"We expect more revenues from the consumer side as early as this year, in 2023, than the other streams," he says.

Be smart: Quris' technology is not yet reimbursed by commercial or government payors, which somewhat disincentivizes mass use.

Context: The clinical trial landscape is long overdue for a shakeup, with the COVID pandemic driving a shift to decentralized trials and increasing demand for technology solutions.

Last week, President Biden signed the FDA Modernization Act 2.0 into law, allowing alternatives to animal testing for purposes of drug and biological product applications. 

The new law, which recognizes the shortcomings of animal-based testing, creates increased demand for solutions to determine drug safety, like Quris, Bentwich says. 

Additionally, private equity is bullish on pharma services, with more investment expected to flood the sector this year.

What's next: Quris' platform currently vets only the safety of drugs, but the platform is capable of determining efficacy eventually, Bentwich says.

What's happening:  Quris expects to launch the round in the second quarter and is in initial talks with prospective Series A investors now.

Yes, but: Bentwich is leery of currently dismal fundraising conditions.

"We are fortunate to be backed by strong and very supportive investors, and we're well funded," he says. "We don't need the money immediately." 

Catch up fast: Quris just secured an extra $9 million in seed funding, bringing total seed capital raised to $37 million.

The seed was led by SoftBank Vision Fund 2, alongside existing private and institutional investors such as GlenRock Capital, iAngels, Welltech Ventures and Richter Group. 

The seed funding will last Quris two years, Bentwich says.  

2. The BFD: Quris eyeing $100M Series A

Illustration of a tidal wave of money about to overtake a red cross.

HD, a Bangkok-based “Airbnb for surgeons,” has raised $6m from Partech Partners, M Venture Partners, AC Ventures, iSeed and Orvel Ventures. https://axios.link/3Z72b7I

Platform Partners has invested in lab testing and pain management provider Principle Health Systems. https://axios.link/3vVfuLj

Centerbridge Partners and The Vistria Group-backed home care company Help at Home have acquired Open Systems Healthcare's home care operations in Pennsylvania and Delaware. https://axios.link/3GfnlI7

DW Healthcare Partners has invested in medical education company Med Learning Group. https://axios.link/3vztNEW

SAI MedPartners, a Northlane Capital Partners-backed life sciences consultancy business, has acquired research consulting group Fulcrum Research Group. https://axios.link/3ZmYHyf

3. Deals o' the day

Cardinal Health has named former Olive AI senior manager Brian Werth software engineering manager.

Oula has named former Tia director of strategic integrations Aparna Patankar senior director of business development.

R1 RCM has named former Olive AI product manager Anay Amin senior product manager.

Calibrate has named former FemTec Health controller Georgina Dengl its controller.

FTI Capital Advisors has named former Capstone partners Rod Rivera senior managing director and David Baker and Roger Kahn managing directors.

Cressey & Company has promoted Ryan Moseley to partner and Matt Gorski to principal.

4. It's Personnel 

❤️‍🩹 Situational awareness: GE has completed the separation of its health care business, and GE HealthCare Technologies starts trading on NASDAQ today. 

🎿 Erin hit the slopes for the first time this season and enjoyed a gorgeous view from the top.

💚 Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Brad Bonhall. Please ask your friends and colleagues to sign up.

January 04, 2023

1 big thing: Cash is king for health-tech M&A